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Tax planning for S corporations

TCP Chapter 14 · Area III · Blueprint III.C

An S corporation that used to be a C corporation carries baggage: built-in gains, old earnings and profits, and the risk of losing its election. The Blueprint asks you to project and minimize the built-in gains tax, identify what happens when an S election ends, derive the results of contributions, distributions and shareholder loans after formation, and decide whether to elect to distribute old E&P before the accumulated adjustments account. Tessa and Leo advise Hearthstone, Inc., a former C corporation that became an S corporation on January 1, 2024, owned 60% by Ruth Hale and 40% by her brother Paul. Figures are for 2026.

In this chapter

1. Projecting and minimizing the built-in gains tax
2. Terminating an S election
3. Contributions, distributions and shareholder loans after formation
4. Electing to distribute accumulated E&P first
5. The excess passive investment income tax
6. Paying owners: salary, fringe benefits and state tax elections

This chapter has 6 lessons, 50 practice MCQs with explanations and 20 simulations, plus flashcards and a recall sheet.

What this chapter covers

• Reasonable compensation
• 2% shareholder benefits
• built-in gains tax planning
• excess passive income
• ending the S election
• shareholder loans
• the election to distribute AEP first

Chapter 13: Tax planning for C corporations · Chapter 15: Tax planning for partnerships